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Sometimes a market can appear to have strong support and strong resistance. What do you do at a time like this? You may answer that you just sit aside and wait, which is true to a point. But have you ever then taken your eye off the ball and forgotten about that stock, only to check it out a week later and find you have missed a terrific trade? So I would say that you should watch and wait.
Let’s have a look at an actual example to illustrate the point. I just have to use Lihir gold (LGL) again, as it keeps giving such great examples. I’m sure you can find some other equally good ones; if so, please send them to me!
Chart 1 – History of LGL
click chart to enlarge
Chart 1 is a monthly chart of the entire history of LGL. This is the starting point for any market that you come across for the first time. I have marked on it the major highs and lows of its history. If you have attended an Interactive Trading Workshop you will be immediately thinking of Resistance Cards at this point – Highs, Lows and Ranges.
I want you to think carefully about what I am doing here. I am starting by stepping back and looking at the whole picture, and I am going to look at the major ranges on the major resistance cards. In my experience students often look too much at small details before they step back like this.
Chart 2 – Major Ranges
click chart to enlarge
In Chart 2 there are 2 ranges marked – the range from the May 2004 low to the October 2007 high, and the range down from the 2007 high to the October 2008 low. Notice the two 50% lines from those ranges. Again, this is often a good way to look at a market for the first time – calculate 50% of the major ranges and see what they tell you.
Moving down to the daily chart, you can see how these two 50% lines are holding the recent moves in the market.
Chart 3 – Current Position
click chart to enlarge
In addition, the market is currently sitting 90° from the December high and 270° from the June high, and has rallied to the level of the 29 October low. Remember that old bottoms become tops.
Now, if we look in still further, there is currently an ABC long trade showing.
Chart 4 – ABC Long Trade
click chart to enlarge
Doing a quick trade check, we note the following:
- Point C has retraced less than 50%;
- A-B range is expanding;
- B-C range is contracting;
- Volume is greater from A to B;
- There are gaps in the run from A to B;
- Weekly trend is uncertain.
As you can see, at the time of writing this trade would have been filled, but the question is, would you want to take the trade? I’ll let you answer this for yourself, but my preference is not to take trades that show time and price harmony around Point B. And even though the trade was filled today, volume did not pick up and the market only pushed to the 50% level and then fell back again.
So what could you do? Gann’s phrase is ‘let the market tell its story.’ If it can break above the upper 50% level, look for a long entry signal. But if it heads lower, you could wait until it breaks below the lower 50% level and then look for a short entry signal.
Knowledge is Power!
Tim Walker
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